Consumers Should Be Wary of "Securitization"

This article appeared in the October 16, 1997 Detroit Free Press.

With the debate over electricity deregulation progressing steadily, Michigan consumers may be convinced that the dream of a competitive power market may soon become a reality. Unfortunately, if the state’s largest electric utility monopolies get their way, this dream could become a costly nightmare. A utility backed plan known as "securitization" has been the focal point of much of the deregulation discussion lately. It is no way out of the costly nightmare.

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The state’s electric monopolies—most notably Detroit Edison and Consumers Energy—have convinced many policy makers that someone besides the utilities and their shareholders should be responsible for picking up the tab associated with their uneconomical past investments, or so-called stranded costs. Securitization is one way of picking up those costs.

Stranded costs are, in reality, nothing more than economic losses companies incur, especially during transitional periods. All industries face stranded costs of some sort, whether it is an old piece of machinery that becomes technologically obsolete over time (the typewriter, for example) or a new product that simply flops when it hits the market (think "New Coke"). When firms incur such losses they typically absorb the costs internally, refinance their assets, restructure their debts, or ask their shareholders to eat some of the costs over time.

The bottom line is that customers are not required by law to pick up the tab for their suppliers’ past mistakes.

In the case of electricity, however, the proposed transition to a competitive market has left the utilities searching for ways to place possible losses on someone else’s shoulders. That someone else, argue the utility officials, should be the state’s captive electricity customers. In other words, although Michigan’s electricity consumers may have thought that deregulation would allow them to escape the grasp of the monopolies, they may have to remain as hostages until a ransom is paid in full.

How much is this ransom? Anywhere between $1 billion and $7 billion, depending on who’s counting. The legislature has yet to put a microscope to the generous stranded cost claims of the utilities, although a bill introduced earlier this month by Rep. Tom Alley, D-West Branch, and based on a proposal by Attorney General Frank Kelley, addresses that issue. Nationwide, estimates run as high as $200 billion to $300 billion, meaning the bailout of the electric industry could easily rival the bailout of the S&Ls as America’s all-time greatest giveaway.

More disturbing, however, is how this ransom is to paid out. Utilities are working overtime to convince lawmakers to give them most of the money they’re asking for up front via the "securitization" of their future losses.

With securitization, utilities estimate their stranded costs and sell bonds equal to the amount they wish to recover. This provides them with a cash windfall at the starting gate of competition.

Electricity customers then will be legally obligated to repay the new bondholders over a multi-year period. This means every electricity bill in the state will contain an additional monthly charge, or transition tax, that will be used to help pay off utility debts over the next few years.

This process can be called many things, but deregulation is not one of them. Securitization entails continued rate-rigging and taxation that were supposed to be eliminated as Michigan moved to consumer choice in electricity.

This isn’t the way electricity deregulation was supposed to turn out. Securitization is not a sensible market mechanism that will make the stranded cost issue disappear, as some policy makers expect. Instead, it will simply transfer the problem onto the shoulders of unwitting and powerless consumers who will, most likely, not even be aware of what is taking place.

If legislators are instead seduced into supporting large-scale securitization, it will represent a major victory for monopoly over the captive ratepayers that policy makers profess to protect.